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Shrinking Goods and Sticky Prices: Theory and Evidence

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  • Avichai Snir

    () (Bar-Ilan University and Humboldt-Universität zu Berlin)

  • Daniel Levy

    () (Department of Economics, Bar Ilan University and RCEA)

Abstract

If producers have more information than consumers about goods’ attributes, then they may use non-price (rather than price) adjustment mechanisms and, consequently, the market may reach a new equilibrium even if prices remain sticky. We study a situation where producers adjust the quantity (per package) rather than the price in response to changes in market conditions. Although consumers should be indifferent between equivalent changes in goods' prices and quantities, empirical evidence suggests that consumers often respond differently to price changes and equivalent quantity changes. We offer a possible explanation for this puzzle by constructing and empirically testing a model in which consumers incur cognitive costs when processing goods’ price and quantity information. The model is based on evidence from cognitive psychology and explains consumers’ decision whether or not to process goods’ price and quantity information. Our findings explain why producers sometimes adjust goods’ prices and sometimes goods’ quantities. In addition, they predict variability in price adjustment costs over time and across economic conditions.

Suggested Citation

  • Avichai Snir & Daniel Levy, 2011. "Shrinking Goods and Sticky Prices: Theory and Evidence," Working Papers 2011-03, Bar-Ilan University, Department of Economics.
  • Handle: RePEc:biu:wpaper:2011-03
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    Cited by:

    1. Christopher J. Erceg & Andrew T. Levin, 2013. "Labor Force Participation and Monetary Policy in the Wake of the Great Recession," UTokyo Price Project Working Paper Series 009, University of Tokyo, Graduate School of Economics.
    2. Andrew T. Young & Daniel Levy, 2014. "Explicit Evidence of an Implicit Contract," Journal of Law, Economics, and Organization, Oxford University Press, pages 804-832.
    3. Leonid Azarnert, 2010. "Après nous le Déluge: fertility and the intensity of struggle against immigration," Journal of Population Economics, Springer;European Society for Population Economics, pages 1339-1349.
    4. Nava Kahana & Yosef Mealem & Shmuel Nitzan, 2009. "The Efficient and Fair Approval of "Multiple-Cost-Single-Benefit" Projects under Unilateral Information," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 11(6), pages 947-960, December.
    5. Andrew T. Young & Daniel Levy, 2014. "Explicit Evidence of an Implicit Contract," Journal of Law, Economics, and Organization, Oxford University Press, pages 804-832.
    6. Avichai Snir & Daniel Levy & Alex Gotler & Haipeng (Allan) Chen, 2012. "Not All Price Endings Are Created Equal: Price Points and Asymmetric Price Rigidity," Working Paper series 69_12, Rimini Centre for Economic Analysis.
    7. Mark Zbaracki & Mark Bergen & Shantanu Dutta & Daniel Levy & Mark Ritson, 2005. "Beyond the Cost of Price Adjustment: Investments in Pricing Capital," Macroeconomics 0505013, EconWPA.
    8. Adi Schnytzer & Guy Weinberg, 2011. "Testing for Home Team and Favorite Biases in the Australian Rules Football Fixed Odds and Point Spread Betting Markets," Working Papers 2011-13, Bar-Ilan University, Department of Economics.
    9. Catalina Amuedo-Dorantes & Sara de la Rica, 2008. "Complements or Substitutes? Immigrant and Native Task Specialization in Spain," Working Papers 2008-35, FEDEA.
    10. Ehrmann, M. & Pfajfar, D. & Santoro, E., 2014. "Consumer Attitudes and the Epidemiology of Inflation Expectations," Discussion Paper 2014-029, Tilburg University, Center for Economic Research.
    11. Satoshi Imai & Tsutomu Watanabe, 2013. "Product Downsizing and Hidden Price Increases: Evidence from Japan's Deflationary Period," UTokyo Price Project Working Paper Series 008, University of Tokyo, Graduate School of Economics, revised Jun 2013.
    12. Matthew Higgins & Daniel Levy & Andrew Young, 2004. "Many Types of Human Capital and Many Roles in U.S. Growth: Evidence from County-level Educational Attainment Data," Emory Economics 0402, Department of Economics, Emory University (Atlanta).
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    15. Christopher J. Erceg & Andrew T. Levin, 2014. "Labor Force Participation and Monetary Policy in the Wake of the Great Recession," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(S2), pages 3-49, October.
    16. Adi Schnytzer & Martien Lamers & Vasiliki Makropoulou, 2010. "Measuring the Extent of Inside Trading in Horse Betting Markets," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 4(2), pages 21-41, September.
    17. Satoshi Imai & Tsutomu Watanabe, 2013. "Product Downsizing and Hidden Price Increases: Evidence from Japan's Deflationary Period," CARF F-Series CARF-F-320, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    18. Joshua Hall & Kaitlyn Harger & Dean Stansel, 2015. "Economic Freedom and Recidivism: Evidence from US States," International Advances in Economic Research, Springer;International Atlantic Economic Society, pages 155-165.

    More about this item

    Keywords

    Sticky Prices; Rigid Prices; Cognitive Costs of Attention; Information Processing Cost; Price Adjustment; Quantity;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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